Mortgage REITs to Be Hurt By Loss of FHLB Funding: Fitch

Mortgage real estate investment trusts will be hurt modestly in the long run, now that they have been excluded from membership in the Federal Home Loan Bank System, according to Fitch Ratings.

The loss of FHLB fundingwill be a modest credit negative for mortgage REITS, because it weakens the diversification of their funding sources, Fitch analyst Sean Pattap wrote in a Friday research note.

These REITs will need to decide whether to replace FHLB loans with short-term repo funding, or with longer-term borrowings. Both options contain risk, although Fitch views longer-term borrowings as preferable because of its benefit of asset-liability duration matching, outweighing its higher funding costs.

REITs have a five-year period in which to find alternate funding, which should provide ample time, Fitch said.

Some REITs have leaned more heavily on FHLB funding. Tuebor Captive Insurance, a unit of Ladder Capital, counted FHLB loans as about 42% of its funding total at Sept. 30.